Starbuck Profits Drop 53%
Seattle Post-Intelligencer
By ANDREA JAMES
P-I REPORTER
November 11, 2008

After a whirlwind year that included store closures, layoffs and a leadership shuffle, Seattle-based Starbucks Corp. finished with profit of less than half of what it was in 2007.

But Starbucks is poised to "deliver" profits in 2009 even if the economy stays poor, executives tried to assure investors on Monday.

"Starbucks can and will weather the current economic storm by staying the course," Starbucks Chief Executive Howard Schultz said in a conference call. "We felt the effects of the downturn early and we've been preparing for this uncertainty for some time."

The coffee giant has been hit hard by the worst economic downturn in nearly a generation as consumers cling to their dollars even more tightly than analysts had expected.

Even though U.S. same-store sales dropped 8 percent in the fourth quarter, Schultz said that Starbucks is still "faring better than other high-end retailers." Same-store sales are a commonly used indicator in the retail industry that measure sales at stores open at least a year.

Months ago, Wall Street analysts who follow Starbucks had written off 2008 as a lost cause in terms of earnings. After hearing Starbucks' predictions for 2009, one skeptical consultant said Monday that Starbucks executives were viewing the world with "rose-colored glasses."

"You sell $4 cups of coffee, not $500 dresses. You're not on the same playing field relative to other luxury retailers," said Patricia Edwards, retail consultant and founder of Seattle-based Storehouse Partners LLC. "I am concerned, especially in this environment, that they are going to have a real tough time making earnings."

Executives said their optimism was based on cost-cutting, flat sales in October, a strong response to customer-loyalty promotions and the popularity of new items including its Pike Place Roast blend, oatmeal and Vivanno smoothies.

Also, "this past week we hit our stride with the successful promotion around free coffee in the election," Schultz said.

Starbucks has cut more than 1,000 positions this year and continues to trim. Last week, it decided to eliminate 135 more jobs, including 85 in Kent and Seattle. The Kent roasting plant has 250 employees; 65 have been notified that their jobs will be gone in January.

Schultz declined to speculate to the Seattle P-I on whether any headquarters employees would be replaced, saying that, "I don't think anyone can predict where the economy is going to go in 2009. ... We made very tough, courageous decisions, but we did it with a very strong understanding about the sensibility of doing things the right way."

For the fiscal year that ended Sept. 28, Starbucks' profit fell 53 percent to $315.5 million, or 43 cents per share. Wall Street analysts had expected 74 cents per share.

Fourth-quarter profit dropped 97 percent because of declining foot traffic into U.S. stores and costs related to closing underperforming stores. Starbucks reported quarterly net income of $5.4 million, or a penny a share, compared with $158.5 million, or 21 cents, a year earlier. Excluding the costs of closing 600 stores in the U.S. and 61 in Australia, Starbucks earned 10 cents per share.

Wall Street analysts had expected 13 cents per share in the fourth quarter.

Despite the bleak Starbucks news this year, the company still brought in $10.4 billion, a 10 percent increase over 2007. Quarterly revenue grew 3 percent to $2.52 billion.

Starbucks' expectations for 2009 varied, depending on how deeply consumers cut back spending. If same-store sales should fall 7 percent, Starbucks would earn 59 cents per share. If same-store sales fall 3 percent in 2009, as they did in 2008, Starbucks would earn 71 cents per share, excluding one-time charges related to exiting leases for closed stores.

Starbucks shares fell 28 cents to $9.92 in after-hours trading, after closing down 3.3 percent at $10.20.

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